has the capacity of cryptography to impact our lives. For his part, Grigg believed it would lead to a programmable record-keeping system that would make fraud virtually impossible. In a nutshell, the concept took the existing, double-entry bookkeeping system and added a third book: the independent, open ledger that’s secured by cryptographic methods so that no one can change it. Grigg saw it as a way to combat fraud.
The way Grigg described it, users would maintain their own, double-entry accounts, but added to these digitized books would be another function, essentially a time stamp, a cryptographically secured, signed receipt of every transaction. (The concept of a “signature” in cryptography means something far more scientific than a handwritten scrawl; it entails combining two associated numbers, or “keys”—one publicly known, the other private—to mathematically prove that the entity making the signature is uniquely authorized to do so.) Grigg envisioned his triple-entry accounting as a software program that would run within, say, a large company or organization. But the third ledger, containing the sequence of all those signed receipts, could be verified publicly, and in real time. Any deviation from its time-stamped records would be an indication of a fraud. Picture a fraud like Bernie Madoff’s, in which Madoff was simply making up transactions and recording them in completely fictitious books, and you can see the value in a system that can verify accounts in real time.
Before Grigg, in the 1990s, another visionary had also seen the potential power of a digital ledger. Nick Szabo was an early Cypherpunk and developed some of the concepts that underlie Bitcoin, which is one reason why some suspect he is Satoshi Nakamoto. His protocol has at its heart a spreadsheet that runs on a “virtual machine”—such as a network of interlinked computers—accessible to multiple parties. Szabo envisioned an intricate system of both private and public data that would protect private identities but provide enough public information about transactions to build up a verifiable transaction history. Szabo’s system—he called it the “God Protocol”—is now more than two decades old. Yet it is remarkably similar to the blockchain platforms and protocols that we’ll learn about in the chapters to come. Szabo, Grigg, and others pioneered an approach with the potential to create a record of history that cannot be changed—a record that someone like Madoff, or Lehman’s bankers, could not have meddled with. Their approach might just help restore trust in the systems we use to transact with each other.
Big Math, Openness, and a New Tool for Agreeing on Facts
If communities are to engage in exchange and forge functioning societies, they must find a way to arrive at a commonly accepted foundation of truth. And in the digital age of the twenty-first century, when many communities are formed online, where they transcend borders and legal jurisdictions, the old institutions we’ve used to establish those norms of truth won’t function nearly as well.
Advocates of blockchain solutions say this truth-discovery process is best left to a distributed approach, one over which no single entity has control. That way the approach is not vulnerable to corruption, attack, error, or disaster.
Also, the results should be collated using the hard-to-crack math of cryptography, which prevents them from ever being overwritten in the future. Here’s how cryptography can achieve what it does: it uses data-protecting codes drawn from a set of possible numbers so large that it’s far, far beyond human imagination. The sheer quantity of possibilities makes it impossibly time-consuming to discover the hidden code through “brute force” guesswork—in other words, by testing and discarding each possible number. Consider that Bitcoin is now the most powerful computing network in the world, one whose combined “hashing” rate as of August 2017 enabled all its computers to collectively pore through 7 million trillion different number guesses per second. Well, it would still take that network around 4,500 trillion trillion trillion years to work through all the possible numbers that could be generated by the SHA-256 hashing algorithm that protects Bitcoin’s data. Let the record show that period of time is 36,264 trillion trillion times longer than the current best-estimate age of the universe. Bitcoin’s cryptography is pretty secure.
Yet this system of honest accounting still needs something more than cryptography to work. It needs to open up its sequenced record of traceable, interlinked transactions to public scrutiny. This means that (1) the ledger should be public, and (2) the algorithm that runs it should adhere to open-source principles, with its source code on view for all to see and test.
At the same time, however, the system must allow sufficient privacy capabilities and protections for individuals and their data, as people won’t use it if their personal identities and proprietary business secrets are open for the world to see. Bitcoin deals with this by displaying only the one-off alphanumeric “addresses” that are randomly assigned to users when they receive bitcoin and which tell you nothing about the identity of the people who control them. But it’s not an entirely anonymous system—it’s better described as “pseudonymous.” In Bitcoin it’s possible, by following transaction flows from one address to another, to trace the fund exchanges to an address where users can be identified—such as when they cash out into dollars at a regulated bitcoin exchange that keeps records of its customers’ names, addresses, and other details. For certain cryptographers who take privacy very seriously, that’s not good enough. So a few are developing alternative cryptocurrencies—examples include Zcash, Monero, and Dash—that add even more privacy protection than Bitcoin. These other cryptocurrencies keep enough information on the ledger so that validating computers can be assured that the accounts have not been corrupted or manipulated, but do a more complete job of obscuring identities.
Whether the solution requires these extreme privacy measures or not, the broad model of a new ledger system that we laid out above—distributed, cryptographically secure, public yet private—may be just what’s needed to restore people’s confidence in society’s record-keeping systems. And to encourage people to re-engage in economic exchange and risk-taking.
For society to function, we need a “consensus on facts,” says Tomicah Tillemen, a director at the New America Foundation in Washington and chairman of the Global Blockchain Business Council. “We need to establish a common reality that everyone can bind to. And the way we’ve done that in developed countries is we have institutions that are in charge of establishing those basic facts. Those institutions are under fire right now…. Blockchain has the potential to push back against that erosion and it has the potential to create a new dynamic in which everyone can come to agree on a core set of facts but also ensure the privacy of facts that should not be in the public domain.”
Bitcoin showed how this idea works in one especially important context: money. By giving currency users a means of agreeing on the “facts” of their transactions, it allowed complete strangers to use an independent currency to pay each other securely over the Internet and still have a high level of confidence that counterfeiting was impossible, even in the absence of a centralized ledger-keeper like the Federal Reserve.
The more powerful revelation, however, was that a group of people could reach a consensus on facts without a central entity arbitrating the process. If we think about this as the Israeli historian Yuval Noah Harari would, in terms of how the power of human social organization comes from our ability to craft meaningful stories that we all believe in—notions of religion, nationality, common currency—we can see how important this is. The history of human civilization is not founded on absolute truths per se—after all, even scientific understandings are subject to revision—but on an even more powerful notion of the truth: a consensus, a common understanding on what we take to be the truth, a society-wide agreement that allows us to overcome suspicions, forge trust, and enter into cooperative endeavors. The best way to think about blockchain technology, then, is not as a replacement of trust—as a “trustless” solution, as some cryptocurrency fanatics damagingly describe it—but as a tool upon which society can create the common stories it needs to sow even greater trust, to build social capital, and to forge a better world.
This empowering idea helps explain the growing enthusiasm—sometimes